Taxes, Laws and Finance: Should you buy title insurance?

Unlike real estate lenders, most aircraft lenders don’t require title insurance, so airplane buyers rarely even know about it, let alone purchase it. That can be a big mistake.

As the name implies, title insurance covers your title to the aircraft, ensuring that you own it free and clear of liens and encumbrances.

The list of potential title problems is sobering: forged de-registration notices, bills of sale or releases; invalid documents due to lack of signing authority or incompetence; litigation involving the aircraft; state and federal tax liens; mechanics’ liens—the list goes on. Title insurance guru Frank Polk compiled a list of more than 60 things that can go wrong with an aircraft’s title—most of which have been litigated—that might make you reconsider the value of this coverage.

Title concerns often arise when a buyer acquires an aircraft based or registered outside the U.S. A leading case illustrating the potential horrors of purchasing a foreign-registered aircraft is Faysound Ltd. v. Walter Fuller Aircraft Sales. Defendant Fuller purchased a Falcon 50 from the Philippine Presidential Commission on Good Government (PCGC), an organization supposedly recovering ill-gotten wealth from former cronies of deposed president Ferdinand Marcos. The PCGC had “seized” the Falcon in connection with a court proceeding against one Eduardo Cojuangco, Jr.; the Philippine registration of the aircraft was cancelled; and notice of the cancellation was sent to the FAA, stating that the aircraft was free and clear of lien. Fuller subsequently received a bill of sale from the PCGC (which he duly recorded with the FAA) in consideration of the purchase price, much of which was apparently used to pay off cronies of the new Philippine administration.

Unfortunately for Fuller, Cojuangco didn’t own the aircraft; he was a shareholder of a company that leased it from a Hong Kong corporation called Faysound, which was the Falcon’s true owner. As a result, the PCGC never had any right to seize or sell it. When Faysound sued the hapless Fuller in a U.S. court to recover its aircraft, Fuller lost.

Title insurance can protect you from such problems, in part because of the due diligence the insurer will perform. If Fuller had purchased title insurance for the Philippines, the insurer would have discovered when checking the Philippine aircraft registry that the registration was merely that of a lessee/operator and was subject to a lease agreement with the real owner.

If the aircraft is based or has significant maintenance performed outside its jurisdiction of registration, you should ask the title insurer what diligence should be conducted and what coverage you can buy to provide the best protection. With the right diligence and coverage, the title insurance process can protect you against improper or forged deregistration notices, fraudulent sales, tax liens and other claims and issues unique to foreign deals (such as the invalidity of documents resulting from the peculiar requirements of a foreign jurisdiction).

A common misconception is that hiring a reputable title company to search the FAA Registry and International Registry for filings regarding the aircraft is sufficient to identify all potential title problems. Neither the FAA registry nor even federal law controls valid title; it’s controlled by applicable state law (or foreign law in the case of many imports), and not all liens are filed with the FAA.

Tax liens—a big source of title disputes since the economic downturn of 2008—offer a good example. “People forget to do tax-lien searches because they think all liens are filed with the FAA and that’s simply not the case,” Polk said. Thus, you can be the registered owner for FAA purposes but still end up in a dispute with the prior owner over a tax lien, perhaps requiring you to pay off a lien claimant.

Even checking FAA records and making a timely filing with the FAA may not win the day, as the parties learned in Shacket v. Philko Aviation. In this case, an aircraft dealer sold a Piper Navajo to Mr. and Mrs. Shacket, telling them he’d file the bill of sale for them with the FAA, as was “customary.” Instead of doing so, however, the dealer then purported to sell the same aircraft to Philko, which did file a bill of sale with the FAA. But even though Philko was the registered owner, the court held that the Piper belonged to the Shackets and found that Philko had “actual notice” that the dealer didn’t have good title to the aircraft. (Notoriously, the court said “actual notice” includes “knowledge of facts that would lead a reasonable person to inquire further into the seller’s title.”) Like Fuller, the folks from Philko probably wished they’d had title insurance.

Savvy aircraft buyers not only get a bill of sale from the seller at closing; they also get a warranty of title, which is a standard part of nearly all airplane transactions. Instead of paying for title insurance, can’t the buyer simply rely on the warranty? That’s certainly an option, but many aircraft sellers are little more than shell holding companies that may not even exist when title problems surface. Further, a small group of sellers (mostly lenders and leasing companies) refuse to provide a general warranty of title. They may be willing to guarantee that they didn’t muck up the title, but they won’t guarantee that prior owners or other parties haven’t done so. In that case, title insurance is an absolute must, and you should ask the seller to contribute to its cost.

So should you obtain title insurance when buying an aircraft? It depends. The coverage is worth considering in every purchase of a non-U.S.-registered or -based aircraft, although even there, if you’re buying a jet from the queen of England, you can probably live without it. If you’re buying an aircraft based and registered in the U.S., title insurance may be worth having, depending upon the identity and financial condition of the seller, the nature of the seller’s title warranty and the history of the airplane.

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